Are we witnessing the re-emergence of Asia as the centre of world commerce again? has the thaw begun?

In the past couple of weeks there has been some interesting developments emerging from China, and increasingly interesting reactions from share market investors. The first development has been the announcement that China has reset growth targets to 7.5%, which has been accompanied by investor concern around the world. The second major development has been the announcement that China has become a net importer for the first time in many years. This development too has led to falls in the share market and currencies such as the Australian Dollar, which is now seen as somewhat of a proxy for Chinese economic success. The reaction of the share market to each of these developments has been perhaps one-dimensional and not thought out or considered.

So what can we read into these developments?

Well firstly, these announcements do have a lot to do with the global economy and both developments are linked. Economic growth in both North America and Europe has been low, and there has been a parallel fall in demand for Chinese exports. This does not necessarily mean there is a fall in export growth from China, as there was still growth of exports in the last reporting period (17%), it was just that import growth well exceeded exports (35+%). This led to a net import position. Chinese exports are still in demand, but the growth phase may now have slowed. This slow down has been replicated in the new growth figures announced. It appears the market is unhappy with the lower growth targets, after nearly a decade of growth above 10%. Any follower of economic commentary on China over the past five years will remember the often stated concerns about China overheating due to unsustainable growth targets. These commentators suggested a target approaching 8% was much more sustainable in the long-term. So the growth target announced in China is still in this acceptable band. In my view the markets and China watchers should be rejoicing the sustained levels of growth in China and it’s resolute strength in withstanding the economic crisis in North America and Europe.

The Chinese middle class is emerging and they are increasingly seeking premium products. This presents a great opportunity for those international businesses with a capacity to supply

The effect of these developments on geopolitics is probably mostly related to the relative value of the Yuan (RMB), which many western politicians particularly in the US have criticised for being undervalued. The trade deficit just posted demonstrates to the Chinese that the currency positioning is about correct (despite a small depreciation in the Yuan against the $US in recent days). I would expect the Yuan to remain around this level for the foreseeable future and not appreciate further against the $US in the manner that we have seen in the past 5 years (which has been around 30%).

So What does this mean for the everyday business engaging with the Chinese market?

Well I would suggest it is not bad at all. Chinese government forecasts are moving towards an inward and domestic focus. The incoming Chinese leadership will most seek to expand the domestic economy and lift more people out of poverty and into the middle class. This will have a positive effect upon most businesses in countries such as Australia and the US. The emerging middle class will have a greater capacity to purchase foreign products, particularly in premium segments. This is all part of the global transition to the Asian Century, where a structural change is occurring in the global economy. The years to come will see China become a net consumer of products and services from the west. So if your business is geared towards selling value added products, then the Chinese market could well be the place to market your products in the years (or months) to come. If you are seeking to source low-cost labour for manufacturing….well I would be seeking other markets in the region. The Asian Century is here to stay and the rules of engagement are changing. These recent developments in China may well be the first signs of the global economic transition towards Asia.

The recent announcement by the powers that be in China that the RMB will have its pegging to the US Dollar loosened has received a mixed response from world markets. In the long-term it is safe to assume that there will be an appreciation in the value of the RMB, which will ultimately lead to increased costs of manufacture in China. When we add this to the already increasing costs of labour in China over the past two years, it is bad news for western companies looking to achieve super low cost manufacture in China. The Flip side to this is obviously that foreign products imported into China will now become more affordable. This is an indication of the gradual evolution of the Chinese market – a market that no longer is just a place of low cost manufacture, but a global marketplace in which Australian companies should be taking advantage.

In the past decade there have been many analysts who have suggested that the Chinese economy is overheating, and that it surely can’t sustain GDP growth rates around 10% for the long term. Surely it is a bubble that is going to burst they said…. has the bubble burst? The answer to that question is a definitive NO in 2010. The GFC was as good a time as any to be the catalyst for an economic meltdown in China, particularly as the major western developed economies in North America and Europe went into economic free fall. Demand for Chinese goods from these markets would collapse, and as a consequence so would the Chinese economy collapse. This has clearly not occurred, in large part to the Chinese Governments successful economic stimulus package, as well as the growing demand for Chinese goods amongst the emerging Chinese middle class. Times are still good in China and with the Shanghai World Expo 2010 on show, China wants the world to know what opportunities lie at its doorstep.

Consumers aplenty in Beijing

China is no longer JUST the cheap manufacturing centre of the world, it is a growing and exciting market in its own right. The emergence of the middle class in China, has seen a demand for western products grow, shopping malls, with everyday western brands are springing up in cities all over China, from Urumqi in the North West, to Guangzhou in the South East of China. It is not just the cheap western brands like KFC and McDonald’s either, you will find malls filled with the latest HP computers, Canon and Nikon Cameras, Apple MP3 players, as well as Rolex watches, Carrefour Shopping centres, and Nike clothing ranges. These malls are mostly filled with the real deal, not the ethically questionable counterfeit products of these same brands in China. That is not to suggest that there are not issues with counterfeit products in China, but in general they have moved on from the mainstream malls where the middle class are shopping. China is screaming out for brands and products to fill its shelves, and Australian products hold a crucial market advantage.

Australian products, are generally favourably looked upon in China, notwithstanding the recent political confrontations over mining. Australia and China have a special relationship, due to the ongoing and necessary minerals export to China, and if you are in that industry I don’t have to tell you how keen the Chinese are for your produce! Australia is the clean, green, land of opportunity for the Chinese, and Australian companies should be leveraging this perception. The main thing to remember with China is that it is a HUGE market, of over 1.3 Billion people, and so just about any product or industry will have a market opportunity in China. So think about how your product could appeal to a Chinese market. Do you want a piece of the action?

The challenge with China is to make sure you undertake due diligence in your investigations into the potential opportunities, while ensuring your company is managing your risk. China can be a daunting place, and many companies have been ripped off by not preparing correctly before entering the market. The Scout motto of Be Prepared is a good motto to consider for business in China. Once you’re prepared then China definitely is Open for Business.